PowerRatings Danger Zone: 3 Overbought Stocks for Traders

Even among stocks with low Short Term PowerRatings of 3 or less there can be important differences that will separate a stock that will move dramatically lower from one that may only drift marginally to the downside or even slide sideways rather than correct lower.

How do we separate the best trade opportunities among the low Short Term PowerRating stocks from those that might be merely "OK" or mediocre?

Our first "screen" is to make sure, if we are looking to bet against stocks, that the low Short Term PowerRating stock is below its 200-day moving average. From time to time stocks with low Short Term PowerRatings will appear above their 200-day moving averages. This can happen when stocks have tremendous runs to the upside without pausing or pulling back.

These super strong stocks are not stocks we want to sell short – even if they have low Short Term PowerRatings. For us, shorting stocks that are showing such obvious strength above the 200-day moving average is a little like stepping in front of a moving freight train. You might make it in time. But the odds of getting squashed are strong enough to keep most of us off the rails.

Once we've cleared the area of low Short Term PowerRating stocks, we like to narrow the list down even further so as to focus on the stocks with the lowest possible Short Term PowerRatings. While stocks with Short Term PowerRatings of 3 are not stocks to be buying, they are not nearly as dangerous as stocks with Short Term PowerRatings of 2 or, especially, 1.

So while stocks with Short Term PowerRatings of 3 may be stocks to avoid, the true short selling candidates tend to be the 2s and 1s.

Lastly, we like to look at a number of technical indicators and patterns that our research has indicated do an excellent job in spotting markets that are oversold or, in the case of low Short Term PowerRatings stocks, overbought.

These indicators range from consecutive up or down days and gaps up or down to stocks being up or down by 10% in a few days or, one of my favorites, overbought and oversold readings in the 2-period RSI.

We use these indicators to see if we can find even more edges that will help us see which stocks are displaying the most oversold or overbought characteristics. It is a way of further limiting our list of potential candidates so as to be left with only the best and most likely to perform as expected.

Here are three such stocks. All three stocks are trading below the 200-day moving average, which gets them "in the door" as candidates. Additinoally, all three stocks have Short Term PowerRatings of 1, for example. This means that, according to our research, these three stocks belong to that class of stocks that have underperformed the average stock by nearly 5 to 1.

All three of these stocks also have 2-period Relative Strength Index values of 98 or more. We have found that stocks with 2-period RSIs of 98 or more actually underperform the average stock in one-day, two-day and one-week timeframes.

Add all three of these factors together and you see why these three stocks are in the PowerRatings Danger Zone. Dangerous, that is, for all but those traders who like to sell stocks short.

Cheniere Energy Partners (CQP | Quote | Chart | News | PowerRating) Short Term PowerRatings 1. RSI(2): 64.35 (from 98.18)

FirstFed Financial Corporation (FED | Quote | Chart | News | PowerRating) Short Term PowerRatings 1. RSI(2): 58.72 (from 99.22)

Rogers Corporation (ROG | Quote | Chart | News | PowerRating) Short Term PowerRatings 1. RSI(2): 99.90 (from 99.77

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